Who needs to act: Companies that are signatory to a collective bargaining agreement requiring contributions to a multiemployer defined benefit plan. Employers in heavily unionized industries such as construction, transportation and manufacturing are often subject to collective bargaining agreements that require contributions to multiemployer pension plans.
When: This is effective for periods ending after December 15, 2012. (Changes in disclosure requirements regarding these multiemployer pension plans hit public companies last year, and now are going to hit nonpublic companies next month.)
What must be disclosed:
The following information is required in a tabular format:
• Each plan’s legal name and Employer Identification Number
• The health of each plan based on its Pension Protection Act of 2006 “zone status”
o Red zone (critical) – less than 65% funded
o Yellow zone (endangered) – less than 80% funded
o Green zone – at least 80% funded
• The expiration date(s) of collective bargaining agreements and minimum funding agreements
• Identification of Plans for which the employer represents more than 5% of the Plan’s total contribution
• Identification of Plans that are subject to a funding improvement plan and whether any surcharges were paid
• The total amount of contributions paid to each individually material plan and the total contributions made to other plans
• A description of any changes affecting the comparability from period to period for each period in which an income statement is presented such as:
o A business combination or divestiture
o A change in the contractual employer contribution rate
o A change in the number employees covered by the plan during the year
These disclosures are to be based on the most recently available information through the date at which the company has evaluated subsequent events. The funding zone certifications are required to be completed within 90 days after the start of a plan year and are based on the end of the year asset values. Practically, it is likely that many companies will present funding status information as of the beginning of the year. For example, a company’s December 31, 2012 audited financial statements would likely present the funding zone certifications as of January 1, 2012.
It is anticipated that using the Employer Identification Number and the Plan names, financial statement users can obtain additional information for other sources such as the plans’ Form 5500 filings. Such information is available on the Department of Labor’s EFAST 2 website.
What can be done right now:
In preparation for these new disclosures, companies should begin by gathering the necessary information including:
• Collective bargaining agreements
• Funding zone certifications from each plan’s administrator
• A schedule of contributions made to each plan
Why the new disclosure requirement was enacted:
The Pension Protection Act of 2006 shed light on the precarious state of many multiemployer pension plans and left financial statement users clamoring for enhanced disclosures from companies that are signatory to collective bargaining agreements. As a result, the Financial Accounting Standards Board (FASB) issued ASU 2011-09 to help users of the financial statements better assess the cash flow obligations related to multiemployer pension plans. The update does not change the recognition requirements; rather, it focuses on enhanced disclosures.
What set the stage for the update:
Multiemployer benefit plans were created as a means by which unionized employees could move between employers and continue to receive benefits for retirement and healthcare. The assets contributed to the plan become commingled to support the benefits of all plan participants, regardless of employer. This differs from plans which only comingle the assets contributed by employees of one company.
Therefore, when a participating employer is unable to make its required contributions to a multiemployer defined benefit plan, the unfunded obligations become the responsibility of the remaining employers. In addition, employers that cease contributions to a multiemployer defined benefit plan can be assessed their share of the unfunded obligation, also known as a “withdrawal liability”.
Employers are not required to recognize a liability for their share of the unfunded obligation and are only required to record a withdrawal liability if it becomes probable that they will cease participation in the plan. Prior to the changes included in Accounting Standards Update (ASU) 2011-09 (the update) Disclosures about an Employer’s Participation in a Multiemployer Plan, disclosure requirements for employers participating in multiemployer plans were similar to those required for single employers sponsoring a defined contribution plan. This included only a minimal requirement of information to assess these off balance sheet obligations and also assess the future cash flows related to the plan.
Given the limited information required to be disclosed related to these plans, consider the difficulties involved in evaluating whether to make an investment in a general contractor that could be signatory to collective bargaining agreements with carpenters, iron workers, laborers, electricians, plumbers and operators. It would be virtually impossible to place an accurate valuation on the busines without some information about the funded status of the multiemployer plans that it participates in. The failure to recognize these future cash flow obligations could result in a significant overstatement in the company’s value.
It is in this environment that FASB issued ASU 2011-09 to help users of the financial statements better assess the cash flow obligations related to multiemployer pension plans.
Why all businesses should be aware of the change:
Businesses considering investments in companies signatory to collective bargaining agreements should engage qualified service providers to assist in the evaluation of this possible unrecorded obligation. The new disclosures included in the update provide financial statement users with the information needed to evaluate the obligations and future cash flows of companies participating in multiemployer defined benefit plans. However, disclosure requirements continue to fall short on providing specific information about potential withdrawal liabilities.
For more information contact David Coomer at [email protected].
